The Federal Reserve’s Long-Term Policy

As you know, we’ve been saying for some time that we believe the Federal Reserve will continue to maintain an accommodative interest rate policy. That was confirmed by the head of the Fed, Jerome Powell, in a speech this week on Fed policy.

In his comments, the Federal Reserve Chairman mentioned that they are committed to keeping interest rates low for a significant period of time. That significant period of time is not a matter of months but years. This confirms our belief that low interest-rate policy will provide a long-term stimulus to the economy. 

There is still much to be done on a governmental basis, but the Federal Reserve has made it very clear they will do all they can to stimulate the economy in a post pandemic world. CNBC recently posted an article outlining the Federal Reserve Chairman‘s comments. In that article they state:

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“But it was the Fed’s guidance that markets found dovish. In the Fed’s latest projections, core inflation is expected to stay low and not reach the Fed’s 2% target until 2023. At the same time, the job market is expected to improve to the point where unemployment is at 4% in 2023, below the longer run rate of 4.1%.

“This is dovish — lower rates for longer, higher equities, weaker dollar,” said Jon Hill, senior fixed income strategist at BMO. “The Fed is saying we’re not hiking in 2023, maybe in 2024. ... What they’re saying is these are our goals. We expect to have just barely met them and even then, they’re not raising

The Fed last month announced a change to its policy, where it will now let inflation run above its target for some time before it moves to raise rates. But in the central tendency of Fed forecasts, the Fed sees core inflation running below 2% through 2022. It expects core personal consumption expenditure inflation at 1.3% to 1.5% this year, and 1.6% to 1.8% next year. The pace reaches 1.9% to 2% by 2023.

 But AB economist Eric Winograd said Powell may have undercut the dovish message he was sending.

“He noted that targeting an inflation overshoot for ‘some time’ as the statement says, means that they are not targeting a ‘sustained’ overshoot. So how long is ‘some time’ if it isn’t sustained?’” Winograd said. “That imprecision is a problem that the committee is going to have to solve to reap the full benefits of the framework shift. It’s not a coincidence that the stock market, which had been in positive territory, flipped negative after the chair’s comments.”

Powell said the Fed expects inflation to ultimately improve. “That’s very strong forward guidance, and we think that will be durable guidance that will provide significant support for the economy,” he said.

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Source: September 16, 2020 CNBC.com
https://www.cnbc.com/2020/09/16/fed-picks-its-side-in-inflation-debate-and-sends-market-a-message-no-rate-hikes-for-years.html 

DWM investment strategy is based on the assumption that interest rates will remain low for a significant period of time. This guides our investment decisions in fixed income assets as well as the type of equity positions we insert into portfolio strategies. 

Being aware of Fed policy helps us to maintain a strategy that is consistent with today’s conditions and future expectations for the economy. This is why we invest so much time focusing on the economy, Fed policy, and business conditions. Making sure portfolios are adjusted based on current circumstances is key.